Biotech has the potential to be one of the most exceptional and lucrative sectors of the stock market. After all, how many other industries can claim they are actually saving lives? It’s true, there are other sectors that contain a winning company or two that could achieve a 10x return on investment… but how many can claim the sheer number of individual companies that have such potential? That being said, many biotech companies can become yet another boom or bust story with everything riding on a single new discovery yet to be realized. In spite of this risk, here are four reasons why we think biotech deserves a place in your portfolio today:
The Biotech Index has outpaced the S&P by over 4x the last 20 years and the Nasdaq by over 2x with an unbelievable 1000% return.
This means if you had $100,000 of your portfolio in just this index in 1997 that same investment would now be worth $1,000,000. Obviously early investments in top picks had many times that return during that same time period. In fact, there have been so many big wins in biotech that Bill Gates, who is debatably the most successful entrepreneur in the last century, has stated publicly that if he were to start again today, he would likely not end up in technology, but could well have chosen the Biotech industry.
Biotech is a growth industry simply due to our aging population.
If we consider Biotech companies are designing drugs, and that as people age they both need and consume a lot more drugs, what other sector has so much obvious sales upside naturally built in? People over the age of 65 in the US numbered 46.2 million in 2014 (the latest year for which data is available). They represented 14.5% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million Americans over age 65, more than doubling the number from 2014.
Decreased regulation and increased FDA approval times.
The Trump administration has indicated they will likely relax the approval process for new drugs and even repeal onerous regulations and red tape that will benefit biotech companies bringing new drugs to market by making this process faster and more efficient.
The Biotech sector is still trading at a significant discount (approximately 25%) from its 2015 high point.
Obviously the golden rule of investing is to buy low and sell high, so buying now before the market responds will afford you the best long-term returns. Often the best opportunities in Biotech come during the initial phases of testing (prior to securing FDA approval) or when the companies are still small and relatively unknown to investors and analysts.
Some examples of recent small cap Biotech opportunities whose stock price have already exploded after reaching the stage of drug approvals include the following companies:
GW Pharmaceuticals (NASDAQ:GWPH)
GW Pharmaceuticals develops and markets commercial cannabinoid prescription medication for various conditions. GWPH went public on May 1, 2013 at $8/share and a market valuation of approximately $200,000,000. The company received approval for Sativex, an oromucosal spray for the treatment of spasticity due to multiple sclerosis. Currently trading at over $100 a share with a market cap of nearly $3 Billion, this is nearly 15 times return in just 4 short years.
Horizon Pharma (NASDAQ:HZNP)
Horizon Pharma was formed in 2011, is headquartered in Dublin, Ireland and its two lead products are DUEXIS and RAYOS. Following a successful launch of these two products the company has gone on an acquisition spree and now boasts a portfolio of pharmaceutical products that intend to treat arthritis, inflammation, and orphan diseases. It distributes under the following brands: The company has a current market valuation of $2.53 Billion.
Jazz Pharmaceuticals Plc (NASDAQ:JAZZ)
The company was founded in 2003 and is headquartered in Dublin, Ireland. Jazz Pharmaceuticals operates as a specialty biopharmaceutical company, which focuses on the identification, development and commercialization of pharmaceutical products. It has a diverse portfolio of products in the areas of narcolepsy, oncology, pain and psychiatry. Its product portfolio includes: XYREM, ERWINAZETM, PRIALT, intrathecal infusion, FAZACLO and LUVOX CR. It currently holds a market valuation of $9.55 Billion which is nearly a 300 times increase from its low market valuation in 2009 of approximately $33 million.
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